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January 10, 2018

New York City Divestment Push Plays Politics with Retiree Savings: What You Need to Know

The Associated Press reports that New York City is reengaging the topic of divestment, with the Mayor making a call for the effort and Comptroller Stringer pushing the funds to pursue the costly, ineffective investment strategy over the next four years. Notably, the media reports the Mayor will be standing side by side with controversial anti-fossil fuel activists when making the announcement, including Bill McKibben, Naomi Klein and Naomi Ages.

It’s hard to count how many reasons why this is a flawed effort, but here we go.

“New York’s two largest pension funds, New York City Employees’ Retirement System and Teachers’ Retirement System, will immediately pursue divesting by 2022, officials said, “consistent with prudent practice and in line with their fiduciary responsibilities.” The other three major pension funds will be encouraged to begin divestment as quickly as practical. Fund trustees also will seek a legal opinion to confirm that carrying out divestment actions would be consistent with trustees’ fiduciary duties to beneficiaries.”

This is not full divestment starting tomorrow but the beginning of a process. After all, it’s only the retirement of one of the largest city’s working and retired police officers, fireman, and teachers on the line.

2) The New York City Comptroller’s office states divestment will only happen if in line with their “fiduciary responsibilities.” We already know why it’s not – see here, here, and here again.

For example, a report by Prof. Daniel Fischel of the University of Chicago Law School found if New York City were to fully divest, it could cost the fund up to $1.5 trillion over a 50-year timeframe and up to $120 million annually. Those loses are only those associated with lost diversification benefits. New York City stands to lose billions more thanks to increased compliance costs and management fees associated with actively managing a portfolio that size.

3) New York City is in direct contradiction to the State Comptroller Tom DiNapoli who has repeatedly rejected divestment. As the Comptroller stated just yesterday:

“The notion that we’re going to lead the fight on climate change by making the pension fund sell all their energy stocks to me seems like not the smartest strategy. We prefer to be an investor and we engage with companies…We would lose that leverage if we’re not at the table anymore as an investor.”

“My fiduciary duty requires me to focus on the long-term value of the Fund. To achieve that objective the Fund works to maximize returns and minimize risks. Key to accomplishing this objective is diversifying the Fund’s investments across sectors and asset classes – including the energy sector, where fossil fuels continue to play an integral role in powering the world’s electricity generators, industry, transportation and infrastructure.”

4) New York City’s announcement is all the more alarming given the state of the pension fund to date. Unlike the New York State Common Retirement Fund – whose leader has rejected divestment time and again — New York City’s five pensions are significantly underfunded.

In fact, Mayor de Blasio’s 2018 budget called for another increase in pension contributions to a record $9.6 billion. Bear in mind, contributions stood at just $1.4 billion when de Blasio’s predecessor Mike Bloomberg came into office.

These numbers are staggering and unsustainable. Currently, New York City’s unfunded pension liabilities are conservatively estimated to be $65 billion as of 2016. By the Mayor’s own projections, contributions will hit $10 billion per year, or 15 percent of all city-funded spending by fiscal year 2021. According to a recent New York Daily Newspiece:

“New York City’s pension costs will soon displace social services as the second-biggest spending category in the city budget, consuming the equivalent of more than 80 cents out of every dollar raised by the city’s personal income tax.”

Yet New York City’s leaders are responding to this crisis by divesting — a move that does nothing to impact the environment but will cost the fund significantly over the long term. Meanwhile, the state pension fund that has rejected divestment to date is close to 90 percent funded.

5) This announcement actually contradicts previous statements from Stringer, who has oft pushed for engagement over full divestment. Translation: Say goodbye to proxy access if you divest. Stringer has also recognized that divestment is a fiduciary question, stating in May 2017:

“When you make a divestment decision you have to go through the fiduciary lens of our retirement system and our retirees. I commend our retirees for being here, but I don’t just represent the couple of dozen that are here, I actually represent 715,000 who depend on us for their retirement security.”

Stringer continued, noting his fiduciary duty to the city and pensioners:

“I understand that people want to divest, but I have to come back to you with the real knowledge of what we can do but I’ll also be honest with you to tell you what we can’t do. I owe it to you, but I also owe it to the woman who struggles on the small pension, the mother who I taking care of her kids, the dad who was a coal miner.”

Did this all change for Stringer because of political pressure?

6) Last, and perhaps most important given Mayor DeBlasio’s call for climate change action, divestment has no impact on the environment. Transferring shares from one owner to another is a gesture and does nothing to impact targeted companies or the environment. New Yorkers should spend their tax dollars on real solutions, not bailing out its city and pension leaders who are playing politics against their with their money.

Somewhat unsurprisingly, pensioners believe by an overwhelming majority that the main priority for their fund’s financial managers should be to maximize returns. Spectrem Group’s national survey of more than 3,000 pension fund members found 88 percent agreed that their pension fund should be “focused on generating returns; it shouldn’t be making investment decisions on the basis of politics, even if I support the idea or cause.” The findings were similar when zeroed in on New York City respondents, of which 79 percent agreed with the statement.

Bottom Line: However way you slice it, divestment comes with serious costs for taxpayers and pensioners alike. New York City’s leaders are playing politics, but its not with campaign donations: it’s with the collective retirement of police officers, teachers, fireman, and city workers. New York City should listen to Comptroller DiNapoli and reject this effort.

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